Clear Eyed Capitalist

The reef structure for the small business ecosystem

A friend is an independent Registered Investment Advisor. That means she works with clients and helps them plan their investment strategies and carry them out. To do this, she needs to work with a brokerage to get access to the stock market and execute trades. Most online brokerages like Fidelity and Schwab and others have the concept of an Institutional Account – a single account for the investment manager that then has sub-accounts for each client, allowing the investment manager to easily access client accounts to execute needed trades and to pull the agreed-upon fees on a quarterly basis. This infrastructure is a core part of her ability to do business and she currently works with Fidelity. However her experience is that these large platforms are raising her fees to an unsustainable level and have frankly admitted their goal is to get rid of small accounts like hers because they deem it not worth their costs. This seems crazy since it’s almost all software – she noted she rarely speaks to a person at their company.

I’m in a small-business financing class currently and our instructor does consulting with large companies that use distributors for their product – some gas/oil companies and some beverage companies. One company he is working with has decided to cut off all distributors that are smaller than 1 million a year in business because it’s not profitable to work with them. From one perspective I can see this as a shining example of getting smarter and more efficient from the perspective of the central product company, really understanding cost and revenue matching and shedding business that is holding your profitability back. Yet I also see this as another death of opportunity for small business, another avenue closed.

When I think about the obstacles to success in small business, I see more and more obstacles that aren’t related to capital, and certainly aren’t related to willingness to work hard, but are instead formed around lack of connections to friendly infrastructure: mentors, suppliers and distributors. In my readings about international microfinance, a cited advantage of loan groups or associations is that the group also forms a supportive first market for budding entrepreneurs – an economic nursery log. I’m also coming to see festivals that way – I’ve seen a few food businesses start out as booths and build a clientele before jumping into a restaurant. We need more opportunities like that, more reefs for businesses to build on if we want to have a thriving economy.

I’m planning to go to a conference this fall on “The Economics of Peace” . In the brochure there was a quote ““Most Americans don’t realize that a middle class is created and maintained by direct intervention in the marketplace by a democratic government, including laws protecting labor, defining minimum wage, and taxing great wealth” by Thom Hartmann. He elaborates here. It’s a broad statement, but it resonates for me.

I’m not sure what the fix is for the above situations: I don’t want to suggest that government should interfere directly in private companies, government’s role should be in constructing the playing field. Howver increasingly our playing fields are provided by private companies (like Google) because controlling a marketplace is a great route to profitability: think the Apple iTunes store. The problems come when that market owner uses their power to squeeze the players, (I’m thinking of the palm precursor to the iTunes store called Handango) creating lots of dislocation, and yes, opportunity for the next market maker, but small businesses are left trapped in a tumble cycle – a few will grow their way out and many more will wash out.